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Shifting credit standards and the boom and bust in U.S. house prices

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  • John V. Duca
  • John Muellbauer
  • Anthony Murphy

Abstract

The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of U.S. house prices omit credit constraints and perform poorly in the 2000s. We incorporate data on credit constraints for first-time buyers into a model of U.S. house prices based on the (inverted) demand for housing services. The model yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.

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File URL: http://www.dallasfed.org/assets/documents/research/papers/2011/wp1104.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1104.

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Date of creation: 2011
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Handle: RePEc:fip:feddwp:1104

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Keywords: Housing - Prices ; Credit ; Subprime mortgage;

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  1. Cameron, Gavin & Muellbauer, John & Murphy, Anthony, 2006. "Was There a British House Price Bubble? Evidence from a Regional Panel," CEPR Discussion Papers 5619, C.E.P.R. Discussion Papers.
  2. John V. Duca, 2006. "Making sense of the U.S. housing slowdown," Economic Letter, Federal Reserve Bank of Dallas, vol. 1(nov).
  3. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
  4. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
  5. Muellbauer, J & Murphy, A, 1996. "Booms and Busts in the UK Housing Market," Economics Papers 125, Economics Group, Nuffield College, University of Oxford.
  6. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
  7. John V. Duca & Tao Wu, 2009. "Regulation and the Neo-Wicksellian Approach to Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 799-807, 06.
  8. Joseph Tracy & Henry Schneider & Sewin Chan, 1999. "Are stocks overtaking real estate in household portfolios?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Apr).
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  10. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, 05.
  11. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 253-273.
  12. John Geanakoplos, 2010. "Solving the Present Crisis and Managing the Leverage Cycle," Cowles Foundation Discussion Papers 1751, Cowles Foundation for Research in Economics, Yale University.
  13. Cunningham, Christopher R. & Engelhardt, Gary V., 2008. "Housing capital-gains taxation and homeowner mobility: Evidence from the Taxpayer Relief Act of 1997," Journal of Urban Economics, Elsevier, vol. 63(3), pages 803-815, May.
  14. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  15. Gabriel, Stuart A. & Rosenthal, Stuart S., 2010. "Do the GSEs expand the supply of mortgage credit? New evidence of crowd out in the secondary mortgage market," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 975-986, December.
  16. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  17. Duca, John V., 1996. "Deposit Deregulation and the Sensitivity of Housing," Journal of Housing Economics, Elsevier, vol. 5(3), pages 207-226, September.
  18. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.
  19. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
  20. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
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Cited by:
  1. Anundsen, André Kallåk, 2013. "Economic Regime Shifts and the US Subprime Bubble," Memorandum 05/2013, Oslo University, Department of Economics.
  2. John Muellbauer, 2012. "When is a housing market overheated enough to threaten stability?," Economics Series Working Papers 623, University of Oxford, Department of Economics.
  3. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers 201101, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Mar 2011.
  4. John Geanakoplos & Robert Axtell & J. Doyne Farmer & Peter Howitt & Benjamin Conlee & Jonathan Goldstein & Matthew Hendrey & Nathan M. Palmer & Chun-Yi Yang, 2012. "Getting at Systemic Risk via an Agent-Based Model of the Housing Market," American Economic Review, American Economic Association, vol. 102(3), pages 53-58, May.
  5. John V Duca & John Muellbauer & Anthony Murphy, 2012. "Credit standards and the bubble in US house prices: new econometric evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 83-89 Bank for International Settlements.
  6. André K. Anundsen & Eilev S. Jansen, 2013. "Self-reinforcing effects between housing prices and credit: an extended version," Discussion Papers 756, Research Department of Statistics Norway.

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